According to Bank of America economists, the housing market is unlikely to recover for the next few years, and home prices will not improve unless the economy falls into a recession. The bank has a generally pessimistic outlook for the housing sector, seeing a confluence of factors that prevent younger home buyers from returning to the market due to a significant improvement in sales and lower prices. Among them are pandemic-related factors that caused a rush of buyers around 2020-2021, leading to a surge in sales and a rise in interest rates to their highest levels since the early 21st century, coinciding with a sharp rise in inflation. Sales have been trending mostly downward since then, except for a surge earlier this year when expectations that the Federal Reserve would aggressively cut interest rates did not materialize. “The U.S. housing market is in a quagmire and we are not convinced it will be resolved anytime soon,” Bank of America economists Michael Gapen and others said in a note on Monday. “After a surge in home transactions during the pandemic, home buying has receded and stabilized. We see this situation, which reduces home buying capacity and creates a homeowner lock-in effect, limiting home buying, continuing throughout our forecast period,” he added. The home buying capacity situation would not change “barring a recession,” Gapen wrote. In some ways, the housing market is a victim of its own success. After the pandemic, buyers rushed in to take advantage of mortgage rates around 3% or even lower. Now, with 30-year interest rates still hovering around 7%, the “lock-in effect” means homeowners can’t afford to sell their homes in a market where they’re paying more than double the interest rate they paid to buy. This has depressed sales but not prices, and with Fed officials dashing hopes of significant policy easing in the near future and supply levels remaining subdued, little relief is expected in the near term. “We believe it could take six to eight years for the lock-in effect (lack of transactions for existing homes) to go away,” Gapen said. “With the wide spread between current and effective mortgage rates, most homeowners are not planning to move unless they are forced to.” Indeed, existing home sales have plummeted from a seasonally adjusted annual rate of 6.6 million at the start of 2021, according to the National Association of Realtors. In May, the number fell to 4.11 million. Prices, however, have been slow to fall. The median price of an existing home sold last month was $419,300, down from $283,600 in May 2020, according to the National Association of Realtors. Bank of America expects some settling in prices, but this will take several years. The firm expects prices to rise 4.5% in 2024, followed by a 5% increase in 2025, before settling to a 0.5% increase in 2026. However, there could be a forecast error if the pandemic continues to have an impact, which could lead to another 5% increase in 2026. As it stands, the National Association of Realtors’ Home Affordability Index fell in May to its lowest level since November 2023 after rising earlier this year.On the bright side, Bank of America believes “stagnant” sales levels, combined with a “moderately improving” lending environment and low interest rates, could lead to a housing market recovery. “Millennials should also generate structural demand for housing. But affordability remains an issue, and our macroeconomic outlook assumes slower growth and a further cooling in the labor market,” Gapen wrote.
Housing market to remain ‘stagnant’ through at least 2026: Bank of America
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